Liquid mutual funds offer the facility to get instant access to your money

Many do not know this facility offered by certain mutual funds - instant access to your money. Though, it is is for a limited amount currently, it still remains to be a great facility. Click here to read further.
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The English translation of the article is as under:

Many people keep large sums of money in current and savings accounts. They do it for a simple reason: what if the money is needed urgently?

Well, how urgent could be the need? And how much money may be required in such an emergency? It is in just a handful of exceptional cases that one has bothered to consider these two questions.

Most others operate out of fear. The fear is fully expressed in the earlier question about the urgent need. They support this argument further by stating that the emergency comes unannounced. It gives no time for any preparation. The argument is correct that there is no prior notice before an emergency. However, consider any situation – the emergency may come unannounced, but is there some time before money may be required? Even in case of hospitalization, how much money is required upfront? Will the hospital deny admission?

This is where one may consider some unconventional options to put the money to a better use. These options are the innovations in the financial markets that can be used to your advantage.

One such innovation is the liquid mutual funds that can be used for parking money for very short periods of time. One may also consider parking money for as short a period as three to four days. There is no limit on the maximum period for which such funds can be used. The beauty of these products is that there is no maturity period and the investor also need not specify for what period the investment is being made.

These funds have the potential to deliver more than what one gets from savings bank accounts or bank deposits of less than a year’s maturity.

Through a recent development, the regulator has allowed instant redemption facility from these liquid funds upto a maximum of Rs. 50,000 per account or 50% of the balance in the folio, whichever is lower. On redemption, the bank account would be credited within half an hour. This is a fantastic facility in case of emergency.

So go ahead and utilize this facility from the liquid funds.

- Amit Trivedi
The writer is the author of a book "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget"

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You enjoy your holidays and your money works for you, is it possible?

You enjoy your holidays and your money works for you, is it possible? Read my article on the subject in Mid-day Gujarati edition today. ________________________________________________________________________________ English translation is as under: How does it sound when your money works for you even when you are enjoying your holidays? August is the month of festivals and long weekends. Many of us go for mini-vacations – either on some excursions or to meet our families. During such periods, often the money lies idle in the bank accounts. There are no options where the money can be parked to earn some returns. Bank fixed deposits are available for a minimum period of 15 days if the amount is small. That means, the money remains idle in savings or current accounts. With most banks, the current accounts do not earn a single rupee and the interest on savings accounts is a low 4% p.a. In such cases, mutual funds offer an incredible opportunity in form of liquid funds. It is possible to invest amounts as small as Rs. 10,000 and even for weekends. Many large companies use this facility offered by mutual funds to park money for weekends. The liquid funds are open-ended mutual funds and hence the transaction can be done on any business day. Let us say, there is a holiday on a particular Monday, making it a long 3-day weekend – Saturday, Sunday and Monday. If you have surplus money in your bank account on Friday before these holidays, you can invest the same in a liquid fund and simultaneously file for redemption such that you get the money in your bank back on Monday. In case you do not need the money on Monday, you may continue to stay invested. Mutual funds offer a great flexibility in terms of not declaring the investment period in advance. You may invest your money in a liquid fund without mentioning the date of redemption in advance. You may stay invested till the time you do not need the money. As per the website of Value Research, a leading portal for mutual fund information, the liquid funds have delivered the following returns in the past: Table 1: Period Returns (p.a.) Last week 6.76% Last month 7.08% Last 3 months 7.36% Last year 7.83% (Disclaimer: Past performance may or may not be sustained in future) As you can see, the rates of return are around 7% p.a. However, you may also observe that the returns for the shorter periods are lower than the longer periods. This is not like a bank fixed deposits where they offer lower interest rates for shorter periods and higher for longer periods. This has happened in case of liquid funds since in the last some time, the interest rates have come down. Liquid fund is a product that responds to the changes in interest rates in the market very fast. If the interest rates in the economy start going down, the liquid fund returns would get adjusted and if the rates start going up, the liquid fund returns would improve. Let us do some Math with the above numbers. If you have a surplus of Rs. 5 lacs to be invested for a long weekend (3 days), how much do you earn? Table 2: Assumed rate of return Money earned 6.76% Rs. 277.81 7.08% Rs. 290.96 7.36% Rs. 302.47 7.83% Rs. 321.78 (The rates of return are taken from table 1) If you do not need money, as we mentioned earlier and you keep the money in a liquid fund for 10 days, the earnings would be as under: Table 3: Assumed rate of return Money earned 6.76% Rs. 926.03 7.08% Rs. 969.86 7.36% Rs. 1,008.22 7.83% Rs. 1,072.60 (The rates of return are taken from table 1) If in a year, you get four to five such opportunities, we are now talking about serious money. Liquid funds also offer facilities to transact through SMS, increasing the convenience. In fact, just before writing this article, I invested some money in a liquid fund just by sending an SMS. The redemption from the fund account also happens through an SMS. All you need to do is to get a one time mandate registered. So, what are you waiting for? Enjoy your holidays and let your money work for you. The earning would take care of part of the expenses. -        Amit Trivedi The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Transcript of chat on Master Your Money segment on 28th July 2016

Click on the link below to read the transcript of my chat today on www.moneycontrol.com:

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What to see while selecting a liquid fund to invest in ...

What should one consider while selecting a liquid fund? Read my article in Mid-day Gujarati edition on 22nd February here ...

http://www.gujaratimidday.com/business/expert-opinion/expert-views-on-mutual-funds-15


The English translation is as under:

Sometime ago, we saw what to look for if one wants to compare two or more different equity funds. Today, we will discuss how to choose a liquid fund (or ultra-short term bond fund – most retail investors may be fine with the latter and in this article, we will use a common term “liquid fund” for both these categories). In order to decide on the selection criteria, it is important to first identify the objectives for parking money in a liquid fund.

Primarily, there are three reasons why people use liquid funds, (1) as a contingency fund, (2) to park money which would be used for some expenses in the short term, or (3) to temporarily park money meant for investment in equity funds later (at an opportune time or through systematic transfer).

To begin with, let us understand one thing common in all the above objectives: one is looking at (1) safety of capital and (2) easy and convenient liquidity. If the returns are high, it is an additional benefit, but not the primary purpose for investing in liquid funds.

Let us first look at the third of the three objectives listed above, “to temporarily park money meant for investment in equity funds later (at an opportune time or through systematic transfer).” In this case, the objective is to earn higher returns through equity investment. The liquid fund is used only for the purpose of temporary parking. The question here is not about selecting a liquid fund, but of selecting an equity fund. Once you have done that, you need to invest in the liquid fund of the same fund house to enable smooth transfer whenever required. You need not spend too much time on selection of the liquid fund in such a case.

That leaves the first two objectives of putting money in liquid funds. In both cases, the critical point is to get the money as and when needed, without loss in value. Hence, the critical factors to evaluate the schemes should be (1) safety, (2) convenient liquidity, (3) ease of transaction, (4) timely and hassle-free credit of the money in your account when needed.

Let us start with evaluating safety in a liquid fund. We have highlighted earlier that mutual funds are structurally superior to most products on this count. However, even within that, different liquid funds may have different risk levels.

First of all, liquid funds invest predominantly in debt and money market securities issued by companies and banks. These corporate papers carry a risk that the companies may default on their commitments. In such a case, it is wise to check the credit rating profile of the funds. The second thing you need to look at is the average maturity of the portfolio. The lower the average maturity, the safer the fund. You must check this in case of ultra-short term bond funds, but need not worry about the same if you are investing in a liquid fund. In case of liquid funds, SEBI regulations do not allow the fund to invest in any paper having maturity beyond 90 days.

Points no. 2, 3 and 4 would be almost the same for all the funds, except you may want to be doubly sure that the fund does not have any exit load even for a very short period. Since you are investing for an unknown period, exit load may be avoided. You need to check the exit load only at the time of your investment, as the same is applicable for all prospective investments and not on retrospective basis.

Many fund houses these days offer SMS based or App based transactions. These allow extra convenience as you can seamlessly transfer money from your bank account (if registered for the same purpose) to the fund and vice versa.

One more thing, expenses matter in case of liquid funds. Check the expense ratio before investing.

Liquid funds are the easiest products among the mutual funds to understand and benefit from.

So go ahead, and make use of these funds when you have surplus money to be parked for short periods.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Do you have questions about mutual funds?

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Chat transcript - www.moneycontrol.com - 16th July, 2015

Transcript of my chat at www.moneycontrol.com today

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SWP - part two

This article, second of the two articles on the subject, explains two important features of SWP:

1. Tax benefit, and
2. Impact of NAV fluctuations on the withdrawals

Happy reading ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/01122014/01122014-md-gm-12.pdf

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English translation is as under:

Last time, we talked about a convenience offered by mutual funds for those seeking regular income. In that article, we also mentioned the following words of caution: “… please consider this discussion only in the context of liquid and short-term debt funds and no other categories. “

Why is such a caution required? To answer this question, we have to understand how mutual funds work.

A mutual fund is a pooled investment vehicle, which means small amounts are pooled from a large number of investors to create a big corpus. This means, there could be differences between the investment horizons of various investors. Some may invest for a short period, while some may invest for a longer time.

One of the benefits of investing in open-ended mutual funds is the liquidity – any investor can enter the scheme or get out of it on any working day. However, this also means that at all times, there could be three different categories of investors: (1) those entering the scheme, (2) those exiting the scheme and (3) those old investors staying with the scheme.

It is also important to ensure that all the investors get a fair price at all times. This is why the buy and sell transactions in a mutual fund scheme happen at NAV – the Net Asset Value, which is calculated in a transparent and fair manner to be as close as possible to the realizable value.

This NAV is a function of the market value of securities in which the fund has invested. These market prices may fluctuate on a daily basis. Due to this, the mutual fund schemes witness fluctuations in the NAVs.

It is important to understand the above in order to understand why we recommended SWP of fixed amount in a liquid or ultra-short term fund. These categories of funds exhibit very low NAV volatility.

Now, let us go back to the basic objective behind setting up a SWP – it is for an investor who is seeking regular income from the investments. These regular withdrawal transactions, as we saw earlier, happen at the NAV linked prices. Let us see what happens in the below mentioned hypothetical case:

Sr	Amount withdrawn	NAV	Units redeemed
1	Rs. 10,000	Rs. 15	666.667
2	Rs. 10,000	Rs. 13	769.231
3	Rs. 10,000	Rs. 14	714.286
4	Rs. 10,000	Rs. 16	625.000

As can be seen from the above table, at the NAV of Rs. 14, the investor had to redeem 714.286 units, as compared to 625 units when the NAV was Rs. 16. Lower NAV meant withdrawal of more units. Now, if the NAV was constantly growing, such a situation may not pose any trouble. However, fluctuating NAV would mean that at lower prices, one might end up withdrawing more units. This would hurt when the NAV starts to recover after a fall.

While SWP is a good facility, one must also understand its limitations.

From a limitation, let us move onto a benefit of SWP. This might be the favourite of all – Tax efficiency.

Let us assume that an investor has Rs. 1.50 cr to invest and needs regular income of Rs. 12 lacs per year.

If one were to get such income through investment in traditional interest bearing investment option, one would get into the highest income tax slab. Interest income is added to one’s income and taxed at the marginal rate applicable at the respective income level.

On the other hand, let us consider SWP for such an investor. In case of SWP, as we saw in the table earlier, there is a redemption of units. When a unit is redeemed, the amount received consists of two components – principal invested as well as earnings thereof.

Let us say, the investment was made when the NAV was Rs. 12. As per the table above, the first withdrawal happened at NAV of Rs. 15.

Each of the units thus withdrawn was purchased at Rs. 12. The same was redeemed at Rs. 15. Hence, there would be a profit of Rs. 3 per unit. As can be seen, the amount of Rs. 15 has two components: Principal value of Rs. 12 and profit of Rs. 3. Thus, in this case, while the investor gets Rs. 15 per unit, the taxable component is only Rs. 3 – the profit. Principal withdrawal is non-taxable.

Each transaction might have a different combination of principal and profit, which one needs to carefully calculate. However, while interest income of Rs. 12 lacs a year would attract good amount of tax, SWP would result into a much lower taxation.

SWP will not help you get rid of the tax completely. However, it is a tax-deferral scheme. Each Rupee of deferred tax allows one to earn till the time the tax becomes payable. Evaluate your situation and consider the options very carefully.

(The author is not a tax-practitioner and hence one would be advised to consult a tax adviser for further details.)

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.